Arithmetics of Politics

When you don’t know where you are going, any road will take you there. So said the Cheshire cat to Alice who had lost her way, in the Lewis Carroll classic, Alice in Wonderland. The Cheshire cat could well have been speaking about the Congress and the United Progressive Alliance. It could also be a description of the BJP. The two principal national parties have yielded space to fractional derivative traders of politics across the country. While the BJP has fumbled its way by outsourcing agitation off its balance sheet and appropriating the moniker of being obstructionist, it is the Congress which is the bigger loser having wasted the political space it acquired since 2004. It has also driven the economy to the ground.

The Congress and its rainbow umbrella coalition, the UPA, has to its credit the spectacular achievement of rendering a “low-cost, high growth” economy into a “high-cost, low-growth” economy. Through the good times when growth was 9-plus per cent, it had the opportunity to enable the transition of the economy from adhocism to a structured transformation. It has slept at the wheel through the good times, squandered the political capital it gained in 2009 and brought the economy at the precipice of a crisis. If it had acted in good times it could have capitalised on the bull-run in the stock market from 2004 to 2008 to aggressively disinvest. Just a 25 per cent disinvestment in LIC to the people of India could have got over Rs 1 lakh crore. Money thus raised could have been used to fund infrastructure and set up a sinking fund for the bad times. It could have cut the plethora of exemptions to streamline the tax code, pushed critical legislation on natural resources and planned a phased shift in the subsidy regime to users. It should have also used the feel good factor to push administrative reforms to ensure a bang for the buck.

Instead it chose to juice the revenues delivered by high growth to fund political profligacy and sit tight on critical reforms. In the seven years of its tenure 85 bills are pending and 35 have lapsed. In its eighth year in power the Congress is just as lost as Alice. For seven successive quarters the economy has been showing a secular decline in GDP growth but there is for 21 months no sign of a Plan A, leave alone Plan B.

The Near Term… Budget 2012
Budget 2012 in many ways represents the no-win situation. The challenge before the finance minister was to rein in rising inflation, to promote growth and ensure the survival of UPA II. It was a classic case of competing challenges and conflicting compulsions. Curbing inflation requires the government to cut expenditure which it cannot execute. So promotion of growth—which requires bringing down interest rates to promote consumption, investment and employment—was given a go by. It is not surprising that the budget was reduced to an exercise in ensuring the survival of the government. As the FM admitted, he had read the mood of the allies and the mood within the Congress. The arithmetic of politics dictated the algebra of economics.

Typically the budget is an extension of incrementalism witnessed in 2011. That is not good news. In 2011 the slowdown in the economy was only in its inception, in 2012 the crisis is approaching its peak. Most observers tend to focus on headline growth for signs of fragility. So a GDP growth of just around 7 per cent seems alright. But before one says ‘All is Well’ you need to look at more robust evidence. That would be slowing sales, shrinking bottom lines, lower operating profit margins, credit downgrades and most important the queue outside banks for corporate debt restructuring.

It would be tempting to argue that since the Congress-led UPA had little to lose it could have played for broke and enforced the unfinished agenda of reforms. Unfortunately, setbacks in politics normatively translate into a refugee mind-set. The tactical approach of the Congress—and I say Congress because the coalition allies must be celebrating—was to ensure status quo. There is a positive facet to Budget 2012; at least it didn’t succumb to the temptation of wooing voters by deepening of the culture of sops.

The government is at pains to promote the idea that GDP growth in 2012-13 will cross 7.5 per cent. Sure there is no law against optimism; it’s the spirit that fuels capitalism. But hope has to correlate to facts. There is little in the budget in terms of the fiscal impulses to promote growth. With the government borrowing Rs 1,500 crore a day, interest rates are unlikely to come down unless the homeopathic measures to improve liquidity actually pay off. Subsidies are higher than last year and in the backdrop of genuflection we witness to Mamata and allies promises to cut it await credibility. Government borrowing is higher than last year and interest cost is now the highest entry on the government’s balance sheet because there has been no effort to cut expenditure or raise resources from sale of Rs 6 lakh crore worth financial assets on its books. The ambition to curb fiscal deficit to 5.1 per cent of GDP will require a bonanza at the spectrum auctions and a booming stock market. Even if one were to assume it will come down, given the magnitude of the fiscal crisis in centre and states it would be like rearranging the deck chairs to save the Titanic.

Growth also calls for clearing of the mess in the policy domain. A large part of the budget is devoted to the articulation of the imperative for growth but offers little as assurance.

The budget has created new instruments of funding low cost housing and infrastructure projects. However land acquisition, mining rights and environment norms continue to be locked in the infamous “no-go” zone. Land is unavailable but the Land Acquisition policy is stuck since 2006. And it could be stuck till Mamata Banerjee agrees. Power companies are starved of coal and steel companies of iron ore but there is no clarity yet on the new mineral policy as state governments are unwilling to agree with the centre on new guidelines. Coal India is sitting on over Rs 45,000 crore of cash reserves because it cannot buy land and cannot get environmental clearances for land it has bought. On last count Coal India had over 150 applications pending for clearance just with the union environment ministry.

The slowdown in the economy is no great mystery. It is born out of high cost of capital, unavailability of land, inhibiting provisions in labour laws and above all paralysis in decision-making. The economy is in the throes of a crisis which requires structural surgery. Budget 2012 merely offers palliatives, a prescription of committees, assurance about surgical intervention and a homeopathic dose of reforms.

The Medium Term…Mid-Term Polls by 2013
Lazy intellectualism of the chatterati kind suggests that despite the loss Congress has a lot to gain. The tenuous theory is that both BSP and SP will bail out the Congress just in case Mamata Banerjee strikes again. Fact is both BSP and SP have already pledged support to the UPA in their letters to the President. That didn’t stop them from derailing the Lok Pal bill. Neither the SP nor the BSP can be expected to promote the cause of FDI in retail either. On every administrative and legislative hurdle faced by the government, the regional fronts are all arranged against the UPA. It is not without reason.

The only morality in politics is a numerical majority. Given the circumstance of irrelevance faced by the national parties, it is important for them to win regularly to be seen as a winner so that the allies stick to the alliance to get to the magic figure of 272. This pits them directly with the forces of their own coalition both within the government on the policy front and outside on the electoral front. Just as the larger parties try to expand their market share so will the smaller parties. It is this tussle for market share that results in conflicts and it is these conflicts that will rule the politics of economics in the near term.

Technical analysts in stock markets frequently refer to the phenomenon of price resistance—downward and upward—wherein sellers resist pressure. Politics too has a similar phenomenon. For the first 30 to 36 months of any government, most members of Parliament are resistant to the idea of unscheduled polls. It is costly and it could be messy. Like any premature withdrawal from a fixed term investment the returns are eroded. For the first two years of UPA II, Manmohan Singh and his team successfully deployed the threat of elections to thwart and keep at bay coalition allies and the opposition. Pranab Mukherjee often used the spectre of mid-term polls to defend the party’s pusillanimity.

This situation obtained till about January of 2012. The steady erosion in the fortunes of the Congress and the erosion of the UPA’s reputation since the series of setbacks in the Supreme Court have set the allies thinking and all set to ditch. Already the Trinamool Congress and the AIADMK have been pushing for early polls. Their quest since their landslide victories which was in 2011 has been to fortify their numbers in Parliament. This group now has new members. Naveen Patnaik of the BJD in Orissa would like to capitalise on the disarray in the BJP and Congress ranks. Given the sweep in the assembly polls Mulayam Singh Yadav would definitely like to replicate it in Lok Sabha. He now has 22 MPs. Juxtaposition of his 224 assembly seats would translate into 45 Lok Sabha seats. So would the Akalis who were mauled in the last Lok Sabha polls. Add to this pot the BJP which has been longing for an early battle since mid-summer of 2011.So a mid-term poll is closer, round the corner than most people suspect.

Alan Greenspan once said anything could have been the proximate cause for the crash of the stock market in the eighties. The same holds true for Indian politics now. Anything could be the proximate cause of an early poll starting now. The fact of paralysis of governance and the reality of political ambitions of the regional fronts could come together sooner than later.

The Long Term…Third Front Ahead
And if there are mid-term polls, there is a good chance of India seeing a repeat of the 1996 United Front experiment of the tail wagging the dog. In democracy it is the arithmetic of politics that determines the chemical equation of power. In 1996, the BJP had 161 seats in the Lok Sabha and the Congress had 140 seats. After a 13-day stint the BJP government resigned. A 13-party coalition of 171 MPs climbed onto an anti-communalism bandwagon and forced the Congress to support it.

Barring a miracle, the slim off chance of the BJP agreeing on a leader or the Congress finding an idea it does seem the next elections would throw up a new edition of the 1996 khichdi. The first sign of this reality will be visible during the Presidential polls in July where the regional fronts are expected to force a consensus non-BJP, non-Congress candidate on the two national parties. Already the name of Abdul Kalam is up in the air.

And there is no escaping the eventuality of electoral calculus. The scope for improvement seems slim for the BJP. It is already best placed in its strongholds and its gains in Maharashtra could be offset by losses in Karnataka. As for the Congress, erosion seems almost certain given the erosion of vote share in Andhra Pradesh, the poor state of its ally in Tamil Nadu, the surfeit of corruption in Maharashtra…the list goes on. Worse, both the BJP and the Congress are political sideshows in over 150 parliamentary constituencies. In Uttar Pradesh, for instance, between them the Congress and the BJP together have won 65 seats, which is 15 seats less than BSP’s 80.

Translated into parliamentary seats this means the two national parties together would have won barely 13 of the 80 Lok Sabha seats in India’s largest state. In fact in the recent assembly polls reflect the crippling of national parties. Of the 690 seats across the five states the Congress won barely 157 seats and if there was any consolation it was that the BJP won fewer: 111 seats. Assume that it was a house of 690. The Congress and the BJP together couldn’t have reached the halfway mark with their score of 268.

So folks, get ready for the Indian political risotto. For the markets, though, the khichdi government is not such a bad idea. Remember every major change in India has come when the political establishment has been weak. The dream budget of 1997, the 1991 reforms are some instances. The Chinese apparently say “may you live in interesting times” when they want to curse someone. Well, we live in permanently interesting times.